There have been quite a few front-page articles on the “link” between the housing market and the stock market. It seems most opinions take for granted that the slumping housing market will cause a “drag” on the economy, or the stock market, or both. The theory goes that as home values fall (or stop growing), homeowners “feel” less rich, or are less inclined to cash out to consume or invest. Also, a slowdown in the homebuilding industry affects employment, construction stock values, and economic growth.

Surprise. We are now learning that that these links aren’t that firm, and may be more than offeset by other links in other areas.

First, we are learning (or confirming) that the run-up in housing values in 2002-2005 may have been more a factor of easy mortgage money than an increase in demand. Also, uncertainty in the stock market has diverted the attention of investors and speculators away from the equities market and into residential real estate. This inflated the housing bubble.

Second, value appreciation doesn’t translate to an increase in wealth. True wealth is gained through production and industry, not scarcity. So while some homeowners may have “felt” wealthier when their home values shot up, most knew that this wealth was illusory, given the limited uses that the increases could be applied to.

Third, the residential construction industry is a very small fraction of the nation’s economy. And while new home construction has fallen off, commercial construction is still very strong.

Finally, all those investors and speculators who invested in residential real estate, pushing values up, are now looking for other places for a better rate of return, and they are going back to the stock market in greater numbers, pushing the indices up.

Seems the markets may be more rational than many who try to read them.